Good day, everyone and welcome to eBay's second quarter 2007 earnings results conference call. This call is being recorded. With us today from the company are the President and Chief Executive Officer, Ms. Meg Whitman; the Chief Financial Officer, Bob Swan; and Mark Rowen, Vice President of Investor Relations.

I would like to turn the call over to Mark Rowen for opening remarks and introductions.

Mark Rowen

Thank you, operator. Good afternoon. Thank you for joining us and welcome to eBay's earnings release conference call for the second quarter of 2007. Joining me today on the call are Meg Whitman, our President and Chief Executive Officer and Bob Swan, our Chief Financial Officer.

We are providing a slide presentation to accompany Bob's commentary during the call. This conference call is also being broadcast on the Internet, and both the presentation and call are available through the Investor Relations section of the eBay website.

Before we begin, I would like to remind you that during the course of this conference call we may discuss some non-GAAP measures in talking about our company's performance. You can find the reconciliation of those measures to the nearest comparable GAAP measures in the slide presentation accompanying this conference call.

In addition, management may make forward-looking statements regarding matters that involve risk and uncertainties, including those relating to the company's ability to grow its business, user base, and user activity. Our actual results may differ materially from those discussed in this call for a variety of reasons, including:

Our increasing need in established markets to grow revenues from existing users, as well as from new users in established markets; an increasingly competitive environment for our businesses; the complexity of managing a growing company with a broad range of businesses; regulatory, tax, as well as IP and other litigation risks, including risks specific to PayPal in the financial industry and risks specific to Skype's technology in the VoIP industry; our need to upgrade our technology and customer service infrastructure in order to accommodate growth at a reasonable cost, while adding new features and maintaining site stability; foreign exchange rate fluctuations; and the impact and integration of recent and future acquisitions and other transactions.

You can find more information about factors that could affect our results in our annual report on our Form 10-K and our quarterly reports on Form 10-Q, available at http://investor.eBay.com. You should not unduly rely on any forward-looking statements, and we assume no obligation to update them.

Now, let me turn the call over to Meg.

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Thank you, Mark and welcome everyone to today’s conference call. The second quarter of 2007 was a very good one for the company, highlighted by accelerating revenue growth, consistent operating margins and great earnings and free cash flow growth. The company delivered record net revenues of $1.83 billion, representing year-over-year growth of 30%. Earnings per share grew 40%, and free cash flow grew at 45%.

Let me give you some highlights for each of our business areas: marketplaces, payments and communications. Our marketplaces business unit, which is made up of eBay sites around the globe, our expanding classified portfolio, Shopping.com, Rent.com, and StubHub, delivered record net revenues of nearly $1.3 billion this quarter, representing a growth rate of 26%. As our portfolio of businesses continues to diversify, the revenue contribution from our non-GMV driven businesses is growing at a very rapid pace.

Our PayPal team saw total payment volume increase by 32% to $11.7 billion, up from $8.9 billion in the second quarter of last year. Revenue grew to $454 million, an increase of 34% versus a year ago. Merchant services in particular had another great quarter as we added thousands of merchants, delivered accelerating TPV growth and became increasingly ubiquitous across the web in both the U.S. and abroad.

Profitable for the second quarter in a row on a non-GAAP basis, revenue at Skype grew 103% versus the prior year. Skype also added 24 million new users and announced important partnerships with Wal-Mart, Toshiba and Salesforce.com, among others.

Now let me give you a little bit more context on the quarterly results for each of the three business units. Beginning with marketplaces, let's take a look at what we call our GMV-driven businesses first, starting with eBay.

Overall, global eBay sites are performing well. The core metrics we monitor to gauge the health of the marketplace are good, and we are pleased by what we're seeing with the underlying fundamentals around the world. This quarter in the U.S., year-over-year GMV growth was up by about 2 points. We saw increasing strength in non-vehicles GMV, with conversion rates remaining healthy and ASPs continuing to increase. Categories like jewelry, entertainment and electronics, driven primarily by iPhone sales towards the end of the quarter, demonstrated particular strength.

The growth rate in the U.S. is still quite good, and we're pleased with the double-digit year-over-year revenue growth in Germany. However, neither is where we think they can be. Therefore, a lot of time and attention is being spent on the reacceleration of GMV in the U.S. and Germany. The teams in these markets are extremely focused on strategic initiatives to revitalize the core auction business and retain and reengage users.

In preparation for a successful holiday shopping season, upcoming changes include redesigning the eBay home page, improving the finding experience, providing enhanced customer support for top buyers and top sellers, and launching community-focused features like eBay To Go in the U.S. and a revamped community section on eBay.de that contains social networking components.

eBay To Go is exactly the kind of product we think demonstrates the innovation we are putting against our goal of reengaging our users and making the auction experience fun. With more and more websites employing user-generated content, we saw an opportunity to make it easy for eBay members to grab interesting eBay content -- listings or otherwise -- and present it off eBay on sites like MySpace, Bebo or even their own blogs. We have all shared those “Only-on-eBay” listings with friends, and eBay To Go actively encourages that kind of sharing with the goal of bringing more traffic to eBay while underscoring what makes eBay so unique.

Other upcoming efforts include making paying with PayPal on eBay even easier and more intuitive. We are also experimenting with a variety of pricing levers to ensure that we are providing the best economics on the web for sellers. Actually, I think it's safe to say that there will be more changes taking place to the eBay.com and the eBay.de sites over the next several months than have taken place over the last several years. All of these changes will be supported by an aggressive marketing campaign, which is launching in both countries in September.

Reaccelerating GMV in the U.S. and Germany is a priority, and I'm very confident about the direction in which we are headed.

eBay continues to turn in impressive results in other countries. In Europe, the UK delivered strong revenue growth. France just announced its 10 millionth registered user and Italy delivered high double-digit revenue growth and has a well-entrenched position in the Italian eCommerce market. We also acquired a minority stake in GittiGidiyor, one of the largest online marketplaces in Turkey, expanding our geographic footprint into Eastern Europe.

In Asia Pacific we continue to make progress in Korea. Internet Auction Company delivered strong year-over-year GMV growth of 34% during the quarter. Through a focus on improving the buyer experience, better seller economics and enhanced marketing efforts, we are very pleased with the results in Korea and the momentum we're seeing going forward.

We also announced an agreement with Sanook!, the leading online portal in Thailand, to launch an eCommerce site that will enable the 16 million Thai Internet users to participate in local trade, as well as cross-border trade through eBay's global websites. This co-branded Thai-language local site will launch before the end of the year.

In China, our joint venture with TOM Online continues to go well, with the new website going live last week.

Lastly StubHub, our other GMV-driven business in the marketplaces group, continues to be the top destination for consumers to buy or sell tickets secondhand. The company signed multiple strategic partnerships during the quarter with collegiate and professional sports teams, most notably the Tampa Bay Buccaneers of the National Football League.

While GMV is an important indicator of our business, it is not the only one. Let me spend a minute talking about the results from our non-GMV-driven businesses in marketplaces. Our global classifieds business, which includes brands Kijiji, Gumtree, Loquo, Marktplaats and Intoko, is profitable and growing rapidly in key markets around the world.

Through strategic acquisitions and ongoing product launches, we now have a presence in more than 20 markets in more than 750 cities. The total number of monthly unique visitors to these sites is up 83% year over year, with a significant growth contributor being Kijiji, the classified brand we launched internationally in March 2005.

On the last day of the quarter, we launched Kijiji here in the U.S. to buyers and sellers in 220 cities in all 50 states. We believe our success with Kijiji outside of the U.S. is a great indicator of what can be achieved here and expands the buying and selling options we provide to people around the country.

Let me also say a word about our auto classified sites. We have thought for some time that the classified format may play an increasingly important role in the vehicles business in many countries. Our mobile.de business in Germany, which we acquired in 2004, continues to perform very well. We recently launched vehicle classified listings to complement our traditional eBay Motors listings in the UK, Germany, France and Italy, and through both our dealer-focused local market products and Kijiji in the U.S.. These sites are already doing very well, and we believe that classifies will play a larger role as we grow our global vehicles business.

Shopping.com also had a good quarter. Globally, Shopping.com delivered 32% year-over-year revenue growth in Q2. Outside of the U.S., we're pleased that the SDC network of sites is now the UK's number one online comparison shopping destination. This now makes us leaders in the U.S., the UK and Australia.

As for our growing advertising business, our partnerships with Yahoo! and Google are going well. We are bullish about the long-term potential of this monetization mechanism, and Bob will talk more about this business in a few minutes.

During the quarter, we also welcomed StumbleUpon to the eBay family. We think the concept of serendipitous discovery is an exciting complement to traditional search. The company caught our attention with its unique technology, talented employees and passionate user community. The 150% year-over-year growth of its user base has been driven primarily by word of mouth from its loyal and satisfied customer base.

So our marketplaces business unit continues to perform well. We are pleased by the financial performance and the traction we are seeing against many of our new initiatives. We know higher GMV growth in the U.S. and Germany is possible, and we have plans in place to make this happen. But overall, this increasingly broad portfolio of businesses continues to perform well and meet the needs of our buyers and sellers even more effectively.

Now let me turn to payments. PayPal had an outstanding quarter. With more than 153 million accounts worldwide, PayPal is the global leader in online payments. With both accelerating revenue and TPV, PayPal continues to demonstrate very strong momentum.

Our merchant services business continues to perform extremely well. In the second quarter, this business generated nearly $5 billion in TPV. PayPal's presence across the web is becoming more and more pervasive. Brand-name merchants like Northwest Airlines, Southwest Airlines, MTV and FTD.com added PayPal as a payment option, as did thousands of other merchants around the world, including leading apparel retailer Rush Collection in France, leading IT merchant Computer Universe in Germany, and Singapore Post, the country's post carrier.

Our payments partnership with Yahoo! is also going well, with thousands of merchants discovering PayPal Express Checkout through Yahoo! every day.

Our international efforts are also gathering momentum in 35 million European accounts and is already offered on more than 100,000 websites around Europe. We are ahead of the game in terms of signing up merchants, consumers, shopping cart providers and web hosting services for PayPal in Europe.

PayPal continues to be a great business. We are very pleased by the financial performance and the execution against aggressive goals, and we continue to make significant investments to ensure the ongoing success of this business.

Finally, on the communications front, Skype had a good quarter. Skype continued to attract millions of new users, bringing the total number to nearly 220 million. The Skype team continues to engage in innovative partnerships that allow the ease and fun of the Skype product to be offered to new users. For example, Intel sponsored a day of free global calling over Skype on Mother's Day to American and Canadian consumers , a very successful promotion. More than 12 million minutes of free global calls were offered during a 24-hour period.

Skype announced a partnership with the world's largest retailer, Wal-Mart, to offer Skype-certified hardware and prepaid cards in 1,800 of its stores throughout the United States.

As we have said for the last couple of quarters, the focus for Skype remains extending our leadership position by continuing to build the user base, expanding our active ecosystem of developers and partners, and enhancing call quality for users around the world. Skype has delivered in many of these areas, but it is not where we want it to be in terms of user activity. This will require increased attention and focus from the leadership team.

Before I turn today's call over to Bob, I thought I would close by giving you some insights around eBay's evolution over the last three years to help put this quarter's results and the future of our business in context. It goes without saying that our company is a very different one from the one it was in late 2004. At the time, eBay had $3.3 billion in revenue, an organization of 8,000 people in 23 countries, and 135 million users of eBay and 64 million users of PayPal. Today, we're on a trajectory to report more than $7 billion in revenue this year. We now have 14,000 employees and more than half a billion users from nearly every country in the world.

During the last three years, the pace of change on the Internet accelerated. Competition increased, customer expectations changed and technology evolved. We recognized these changes were happening and took some actions to respond. We made a decision that, as the leader in e-commerce, our mission was to ensure that buyers and sellers all over the world could have the type of online commerce experience they wanted, no matter where they lived or what kind of format they wanted to buy or sell in.

So we bought Shopping.com here in the U.S. and extended the footprint of that business abroad. We built and bought a global portfolio of classified sites and more recently, began to transform the user experience on eBay much more rapidly than we had in the past. We also developed PayPal into a major line of business as we stepped up penetration on eBay and built out merchant services. We acquired Skype in the fall of 2005 and are rapidly growing that business.

So here we are, three years later and I can tell you that I have never been more excited about the future of this company. In our marketplaces business, we have a multifaceted consumer-driven plan to accelerate GMV growth in our flagship eBay business. We have other formats in place to capitalize on rapidly growing market segments like auto classifieds and online comparison shopping. And we have a broad global footprint and a strong portfolio of brands and consumer offerings.

We also have a strong eBay Inc. portfolio with PayPal and Skype, two rapidly growing businesses that are very well positioned for the future. We also have the strongest senior management team that we have ever had at the company and we have talented, experienced employees that know how to get to the right strategies and also execute in an ever-changing environment in all of our businesses.

As a company with many different offerings, we have a powerful shared vision that connects all of these businesses. We're united as one company and truly dedicated to what we call social commerce. Social commerce is a powerful combination of commerce, communication and community that enhances traditional buying and selling. As a leader in this area for so many years, eBay has a unique opportunity and a responsibility to dissolve the barriers of time, distance and complexity for our community.

Social commerce is really rooted in a fundamental human truth: that people all over the world have a natural innate desire to connect with others and it is what each business in eBay's family aspires to be the best at delivering, each in its own unique way. Whether that is eBay, PayPal, Kijiji, Shopping.com, Skype or even newly acquired StumbleUpon, we are focused on making that vision a reality.

So that is why I am very optimistic about the remainder of this year and 2008. As we exit the first half of the year and head into the second one, I remain extremely confident about the future of the company and am incredibly pleased to see our well-designed portfolio of businesses gaining traction among global Internet users and ultimately delivering strong financial results for our shareholders.

Now I will turn it over to Bob for a closer look at the numbers.

Bob Swan

Thanks, Meg. Today, I will discuss our Q2 financial performance, along with our outlook for the third quarter and the remainder of 2007. During my discussion, I will be referencing our earnings slide presentation which accompanies our webcast.

Overall, we posted great financial results in Q2. Our results reflect accelerating top line growth, strong earnings growth and excellent free cash flow. Additionally, we continued to redeploy capital to strengthen our business via our share repurchase program and acquisitions. We're now halfway through the year and we are increasingly confident in our ability to deliver even stronger full year revenue and earnings growth.

In total, our business generated record net revenues of $1.83 billion, representing 30% year-over-year growth. Organic revenue, excluding acquisitions and FX, was up 23% versus last year, an acceleration of 2 points versus the first quarter. This acceleration was driven by a strong performance from PayPal and increased traction in advertising.

Non-GAAP EPS was $0.34 for the quarter, a 40% increase from last year and $0.01 higher than the top end of our guidance range. This out performance relative to the top end of our guidance was driven primarily by a lower tax rate and a weaker than anticipated U.S. dollar.

We delivered excellent cash flows as well in the second quarter, generating $533 million of free cash flow, a 45% growth versus last year. The growth was driven primarily by earnings expansion coupled with lower capital expenditures.

Now let's take a closer look at our segment results for the quarter. Overall, our marketplaces business had a good quarter, with strong top line growth and expanded segment margins, while we continued to make significant investments to reinvigorate our core auction business and accelerate our adjacent businesses.

In the second quarter, the marketplaces business achieved net revenues of $1.29 billion, up 26% versus the year-ago period. Global GMV for the quarter was $14.5 billion, a 12% increase over last year. Excluding the impact of foreign exchange, GMV grew by 9%. Consistent with the last several quarters, revenue is growing much faster than GMV as we expand into new formats and introduce new methods of monetizing our traffic.

Now let's walk through some of our key operating metrics. We added nearly 8 million new users in the quarter, bringing the total registered user base to 241 million. New listings in the quarter were 559 million, down 6% versus Q2 last year, with core listings down 2% and store inventory listings down 25%. In the U.S., new listings totaled 244 million, while there were 316 million new listings internationally.

Let me give you some more color on the difference between the 6% decline in new listings and our 26% growth in total marketplaces revenue. There are two primary fundamentals impacting this divergence of growth. First, GMV is growing much faster than new listings; and second, revenue is growing much faster than GMV. Let me elaborate a bit more on this dynamic.

The gap between listings growth and GMV growth is driven primarily by improved core ASPs and conversion rate. FX drove the remaining 3 points to total GMV growth of 12%.

The gap between revenue growth and GMV growth is driven by several factors. First, continued strength in our non-GMV businesses such as Shopping.com, Rent.com, classifieds, and advertising, is contributing 4 points of growth.

Secondly, our recently acquired StubHub tickets business, which features a higher take rate than our eBay platform, as well as our joint ventures in China and Taiwan where we are no longer recognizing local GMV because we now hold a minority interest drove 4 points of the difference.

Third, as Meg indicated earlier, the format of our vehicles business has been shifting. While GMV from vehicles is slowing, we are monetizing this business through other platforms such as our classifieds business and our Local Motors format. We're pleased with the revenue growth these businesses are driving, however, we don't recognize GMV in these formats. These factors combined to account for 3 points of the gap between revenue and GMV growth.

Finally, pricing actions we have taken in the last 12 months drove the remaining 2 points of growth. We expect the trend of revenue growing faster than GMV and listings to continue as we expand into new formats and monetize our traffic in new ways.

Let's now take a closer look at the rest of our marketplaces business. The UK, France and Italy were strong contributors to overall European performance. In Germany, despite a decline in new listings, improved conversion rates and higher ASPs enabled us to deliver GMV growth in the mid single-digits while growing revenue in the double-digits.

In Asia, our Korean business posted sharply accelerating GMV growth driven by continued improvements to the user experience. We believe these results demonstrate the strategies we've put into place in Korea are beginning to resonate with consumers in that market.

Our non-GMV driven businesses were strong contributors to our Q2 growth. Shopping.com continues to grow faster than the overall marketplaces business, while driving our penetration into the growing online comparison shopping segment. Our classifieds business posted nearly triple-digit year-over-year revenue growth. While this segment of our business is small today, it continues to grow at a rapid pace and we're extremely excited about its future potential.

Lastly, our advertising business is starting to gain some significant momentum. Overall, advertising and other revenue was up 77% versus the prior year, increasing from 3.1% of total marketplaces revenue last quarter to 4.2% this quarter. This acceleration was driven primarily by the launch of advertising in our international eBay businesses. We're pleased with the progress we're making and believe that advertising complements our existing transaction-based platform, allowing us to capitalize on our significant traffic.

Overall, we are pleased with our marketplaces business performance this quarter. Our efforts to diversify our business and increase overall monetization continue to show good momentum and we're confident that our significant investments to improve the eBay user experience will make our business even stronger over time.

Now let's turn to our payments business. PayPal had another excellent quarter, posting total revenue of $454 million, a 34% increase versus the same period last year. This quarter's performance underscores the excellent progress we are making in our effort to accelerate the ubiquity of PayPal on the web by expanding our global footprint and increasing our penetration on eBay.

Total payment volume in the quarter was $11.7 billion, representing 32% year-over-year growth and acceleration versus last quarter's growth. TPV grew by 25% in the U.S. and 49% internationally versus last year. Our TPV growth was driven by strength in merchant services and continues to benefit from our ongoing geographic footprint expansion.

In terms of key operating metrics, PayPal added nearly 10 million new accounts in the quarter to end with 153 million total accounts. Global TPV for PayPal's on-eBay business grew by 18%. Global penetration of addressable GMV was 58.8% in the quarter, up 2.3 points over last year.

Our global merchant services business had another phenomenal quarter, generating $4.9 billion of TPV, up 57% year over year, a marked acceleration versus Q1. We continue to attract top online retailers to our platform and we're excited about the excellent traction we're seeing in our global merchant services business.

PayPal's Q2 transaction expense was 1.12%, 10 basis points higher than the year-ago period and 3 basis points higher than last quarter, driven primarily by a higher credit card funding mix versus last year. The credit card funding mix continues to be impacted by a product mix shift largely resulting from strong growth in our merchant services business. The transaction loss rate was 29 basis points this quarter, up 2 points from a year ago, but 3 basis points lower than Q1 '07.

In summary, PayPal had another great quarter and continues to be a key driver of our company’s overall growth. We continue to make significant investments to extend our leadership position in the online payment space, and these investments are paying off.

Looking at our communications business, Skype continues to enjoy healthy growth, posting total revenue of $90 million for the quarter, an increase of 103% versus the year ago period, while delivering a second consecutive quarter of segment profitability. Skype’s total registered users grew to nearly 220 million, representing an increase of 94% from a year ago. Geographically, the majority of new users came from Europe and Asia, while user growth in North America remained strong as well. We believe the distribution partnerships we announced this quarter will help us attract additional new users over time.

Skype-to-Skype minutes in Q2 were 7.1 billion, flat compared to last year, while Skype out minutes were 1.3 billion, representing 57% growth versus the prior year.

While we're pleased with total registered user growth, activation levels are not where we would like them to be. We continue to focus our efforts on engaging our rapidly growing user base and expanding our product and feature set.

Now let's take a look at how our business unit performance translated into non-GAAP financial results. As I indicated earlier, eBay delivered record net revenues of $1.83 billion, up 30% year over year. Acquisitions we made over the last 12 months contributed nearly 3 points to our top line growth and FX, due to a weaker dollar, contributed an additional 4 points of growth. This top line growth, coupled with a lower share count, a lower tax rate and a weaker U.S. dollar drove EPS expansion from $0.24 to $0.34, a 40% increase versus Q2 '06.

Our operating margin was 32.4%, 20 basis points lower than the prior year. Operating leverage, productivity and a weaker U.S. dollar have mostly offset the negative mix impact from the growth of our lower-margin businesses, PayPal and Skype, as well as accelerated investments across all three of our businesses.

Looking at our operating expenses in a bit more detail, first sales and marketing expenses were 24.8% of revenue in Q2, down 50 basis points from the year-ago period. This decline was driven by continued leverage in our marketplaces marketing costs, offset by reinvestment in PayPal marketing initiatives to continue to increase our penetration on the Web.

Next, product development expenses were 7% of revenue, 20 basis points lower than a year ago. We continue to increase our unit capacity at a faster rate than our expenses, and we're using this increased capacity to drive the significant product development roadmap across all of our businesses.

Lastly, G&A at 13.9% of revenue is down 80 basis points year over year. We continue to leverage our existing infrastructure while investing more in PayPal consumer protection programs. Collectively, these factors translated into $595 million of non-GAAP operating income, 29% growth on a year-over-year basis, and non-GAAP net income of $471 million, up 34% from a year ago.

We generated $655 million of operating cash flow and $533 million of free cash flow in the quarter. Capital expenditures were 6.6% of revenue in Q2, and we ended the quarter with nearly $3.8 billion in cash and cash equivalents, despite cash outlays for nearly 350 million share repurchases in the quarter, as well as our acquisition of StumbleUpon.

With that, let me turn to our non-GAAP guidance. With another quarter behind us, we feel good about our results through the first half of 2007. We delivered a great financial performance this quarter, with accelerating top line growth, strong earnings expansion and excellent free cash flow. Our international growth has allowed us to continue to capitalize on a more effective tax structure, and we continue to benefit from a weaker dollar.

As we head into the second half of the year, we're raising our revenue, EPS and free cash flow guidance for the full year. We continue to reinvest our operational out performance back into the business in order to improve the user experience across our businesses and to build PayPal ubiquity across the web. The accelerated capital expenditures we undertook last year have enabled us to reduce our capital investment this year.

Based on these factors, we now expect full-year '07 revenue in the range of $7.3 billion to $7.45 billion, a full year operating margin of approximately 33% and EPS in the range of $1.34 to $1.38. This guidance assumes a U.S. dollar to euro exchange rate of $1.30 and a revised full-year tax rate of 25.5% to 26%. We are also raising our free cash flow forecast to approximately $1.95 billion on full year CapEx of 7% to 8% of revenue.

Looking to the third quarter, we expect net revenues to be in the range of $1.775 billion to $1.825 billion, and EPS of $0.31 to $0.33.

Let me take a minute to put Meg's earlier remarks in a bit more context. As we look back on the business over the past couple of years, it is clear that our business has grown in many different ways. Overall, our mix of business has grown to be more diverse. Our core business has grown stronger over this period of time through geographic expansion and increased penetration of PayPal on eBay. We have expanded into new markets such as merchant services and communications and new formats such as classifieds and online comparison shopping. We have extended into new areas of monetization with advertising.

So where we sit today, we have an excellent portfolio of businesses with a strong core and fast growing adjacencies. I'm confident this portfolio of businesses will continue to drive great results through the remainder of 2007 and beyond.

In summary, our Q2 results show continued strong performance in 2007 and we feel good about our ability to deliver even stronger results for the year.

Meg, how early do you think before we can start seeing the reacceleration in GMV growth in U.S. and Germany that you talked about? In Germany in particular, it looks like your core listings was down 29%, stores up 24%. Does your plan contemplate a fee hike there to balance that platform like you did in the U.S.? Thanks.

Meg Whitman

We are very excited about the plans that the German team has in place. I was there about four weeks ago. I think it is some of the best work I have seen out of any marketplaces team over the last four or five years. They are totally on this issue.

I can't tell you when we will see that acceleration of GMV. It is very difficult to predict. We run a large ecosystem here. We don't ever quite know exactly what lever that we can pull, whether that is products, customer safety, customer support, marketing or pricing is going to do the trick. But we feel very confident that they have diagnosed the situation beautifully. They have a great set of plans in place. I think we are going to have a good second half of the year in Germany.

With regard to the listings, I will turn it over to Bob. That doesn't sound quite right to me, but you may have a better perspective.

Bob Swan

Clearly, in Germany this quarter, listings did decline. For the most part, as I indicated earlier, globally across the board listings declined 6% year over year. Germany was in the same camp. It declined a little bit more, and we are still lapping a strong media listings growth in the second quarter of last year. So the decline is a little more dramatic.

That being said, conversion rates and ASP improved quite dramatically in Germany in the quarter. So as we indicated, we had mid-single-digit GMV growth and revenue growth even stronger than that.

The only other thing I would add, Meg , you also asked about U.S. GMV. While we are not satisfied with it, we did have accelerated GMV from Q1 to Q2. So Q1 was 8% GMV growth. Q2 was 10%. StubHub contributed to that, but also we saw accelerated GMV across almost all categories in the U.S. So we still have lots of work to do. We have some exciting stuff coming in Q3. We will see how it plays out over the rest of the year.

Youssef Squali - Jefferies

Thanks.

Operator

Your next question comes from Aaron Kessler - Piper Jaffray.

Aaron Kessler - Piper Jaffray

Can you talk about your priorities in terms of the improved user experience on eBay in the second half in terms of either fraud or improved user experience? Maybe if you can detail a few of those.

Meg Whitman

Sure, let me take that. As you have correctly pointed out, making improvements to the user experience is one of our main strategic priorities. Let me tell you about a few of them.

First is to improve the finding experience, what we call finding 2.0. You can see that we have actually done some work in something we call DefMatch, which is in fact a relevant and algorithmic search engine that actually, based on your prior searches on eBay and what we know about other people who search for those same items, we think we can get you to the items that you're looking for faster and better.

You might recall in the old age of eBay, you'd do a search for Madonna and you'd get 20,000 items, everything from T-shirts to books. Now we're able to get you there much faster. So the first bucket would be finding.

The second would be making the auction experience even more fun. The first is something we call Bid Assistance, which is really great. We heard from a lot of buyers that they were scared to bid on more than one item because God forbid you won five iPods instead of the one that you really wanted. So we have created something called Bid Assistance that allows you to bid on multiple items. We manage that bidding for you, and you will not win more than one item. That actually has come across with great results.

We have something called eBay Countdown, which actually visualizes the fun of the end of the auction with avatars and showing the race towards the end. We've got Feedback 2.0, which is launched and expanded now in virtually every country. We've got a new homepage layout coming. We have also increased customer support for both buyers and sellers. Also, by the end of the year, we will have a 360-degree view of the customer, so that if you are a PayPal customer and you have issues around your eBay account, we can help you on that same phone call or same chat as opposed to having to transfer you between centers.

Those are probably the highlights. I would direct you to something called www.playground.ebay.com, where we have a really fun site for users to test a number of the new products that we're launching and provide feedback. I think you'll find it to be exciting, and our users are actually giving us great feedback on it.

Aaron Kessler - Piper Jaffray

Great. That's helpful.

Bob Swan

Feel free to buy or bid on something while you are there.

Operator

Your next question comes from Brian Pitz - Banc of America.

Brian Pitz - Banc of America

Thank you. Just a question on your local strategy. You recently launched classifieds site Kijiji in the U.S., as mentioned. Is your primary goal to capture share from craigslist and eventually monetize this site? Or are you really more interested in applying what you may learn from local classifieds to help you with really more local initiatives on the main eBay platform? Thanks.

Meg Whitman

No, we are interested in building a robust classifieds business in the United States. Because of our success internationally, we actually think it is the right platform on which to expand into the U.S. and serve classifieds communities in the U.S. with a new kind of offering.

Interestingly enough, we think actually that the U.S. market is large enough and diverse enough to support a number of different players in this area. This is a very fragmented market. Our plan is to use the U.S. classified business, it is really quite a differentiated offering versus craigslist, with a slightly different target market, and see what happens. If we have anywhere near the success we have had with Kijiji outside the United States, I think we will be quite pleased. We may learn some things that help the eBay U.S., but this is actually a classifieds play in the U.S.

Brian Pitz - Banc of America

Great, thanks.

Operator

Your next question comes from Imran Khan – JP Morgan.

Imran Khan – JP Morgan

Hi, thank you very much for taking my questions. By the way, playground looks great. Meg, if you look at the GMV growth rate of 12%, a decent chunk of the growth rate came from the conversion improvement. What gives you the confidence that once we anniversary some of the changes that you made that conversion can start to improve? How far off are we from historical conversion rates, high conversion rates?

The second question is you just raised your free cash flow target to $2 billion. Why not take the opportunity of a historically low interest rate and do some sort of buy back? Thank you.

Meg Whitman

On the first one, we continue to believe that listings will follow demand. What increase in conversion rate means is that more listings are selling and that our sellers are enjoying more success. As we anniversary a lot of the store inventory format shakeout and cleaning up the sites, our belief is that listings will in fact follow demand.

So we are encouraged by some of those things that we're seeing very early on in the U.S., but we do think that will in fact happen as we go forward.

Do you want to take the capital question?

Bob Swan

On the second question, our focus continues to be on extending our leadership positions in each one of the three business units. We continue to attempt to maintain the financial flexibility to do that, but also redistribute the rapidly growing cash flows to shareholders. So what that has meant a bit historically is in the last two years we spent about $3 billion in cash on acquisitions to strengthen some of our businesses, and you have seen the benefits of that, I think, highlighted in this quarter's performance.

Secondly, in the last ten months we have bought back 75 million in shares and will continue to do that with our share repurchase program. So we've got a great balance sheet. It keeps generating cash. Our focus is on redeploying that as effectively as we can.

As we think about longer-term capital structure, I am sure at a point in time, we will have debt on the balance sheet, but we have determined as of now, maintaining flexibility, reinvesting, grow while redistributing capital through share repurchase, we generate enough cash flows to do that.

Operator

Your next question comes from Ben Schachter - UBS.

Ben Schachter - UBS

Just a follow-up on Kijiji. It was a bit of a softer or quiet launch, and I was wondering if you could talk about what type of an investment you may or may not make there to build the business. Also, what does it mean for your craigslist ownership piece?

Meg, you talked about marketing spend around the new and improved features on the site. Will there be any meaningful bartering agreement with any of your advertising partners to get more advertising on say Yahoo! or Google?

Meg Whitman

With regard to craigslist, we enjoy a good relationship with craigslist and we have been an admirer of their company for a long time. We don't expect this launch to impact our investment in craigslist. We plan to maintain our minority equity stake.

With regard to investment in Kijiji, obviously we've made some investments in the site. But one of the great things about having a global platform is we can actually launch in 220 cities and 50 states at a relatively low cost using the investment that we have made in the Kijiji platform overseas. So it is one of those times when scale actually helps speed.

So we are going to largely grow that organically. We do a little Internet marketing, we do a little direct marketing, but particularly in 2007 and 2008, we want to see how fast we can grow this organically.

With regard to marketing spend, we are actually doing, I think, a great holiday campaign in our three largest markets: the United States, Germany and the UK. To my knowledge, I don't think we have any barter arrangements in place. We used to report barter, I don't know if we still do. If we don't, it is because it is so tiny.

Bob Swan

We don't have anything of significance.

Meg Whitman

So I don't actually think there will be any barter in Q4, but we could get back to you on that.

Bob Swan

The only other thing that I would add is Meg indicated in her comments that the integration and the amount of activity we have going on in terms of new features to make the site more fun and compelling, we want to bring as much traffic back to experience all the new innovation we have. So that is a part of the integrated marketing campaign in the latter part of this year.

Operator

Your next question comes from Douglas Anmuth - Lehman Brothers.

Douglas Anmuth - Lehman Brothers

Just following up on the marketing questions, can you talk a little bit about the marketing campaign in the back half, just in terms of quantifying the dollars that you can potentially spend there? Also, a little bit of color on how the current Windorphins campaign is going, if you are seeing that stimulate any buyer demand?

Also, with your experiments around search moving between providers a little bit late in the quarter, what your key takeaways are there as well. Thank you.

Bob Swan

First, in terms of the marketing question, during the course of this year, our expectations are that our overall margins will be roughly flat with last year at 33%, despite the fact that our lower margin businesses are growing faster than the rest of the portfolio. So we will offset that mix impact with more efficient marketing spend and lower G&A. Those dynamics are not dramatically different as a percent of sales in the second half of the year as they were in the first half. So it won't be dramatically different as a percent of sales.

Meg Whitman

With regard to Windorphins, for those of you on the phone who don't know, Windorphins is a contraction between winning and endorphins, which is designed to underscore that really fun, great, euphoric feeling that you get when you win on eBay. It was a grassroots teaser campaign for our fall full-blown media campaign. It actually had completely the desired effect, which was lots of inquiry, lots of buzz, lots of talk on the blogs and things like that.

So we are really pleased with it, and you will see the first effects as we launch the full-blown campaign here in the United States. But it was exactly the right thing to do and generated a lot of fun and buzz in the user community. Let's see, what was the other question?

Douglas Anmuth - Lehman Brothers

Regarding your search changes late in the quarter.

Meg Whitman

Late in the quarter, as you know, we ran an experiment to see what would happen if we were to change our allocation of Internet marketing between our largest providers. As you know, we pulled back from Google, reallocated to AOL, Ask Jeeves and Yahoo! in particular. We learned a lot from this test that will actually drive our go-forward Internet marketing spend. It has to do with return on investment, where we can get the most leverage.

As you know, we have gone back to spending some money on Google. We will continue to reallocate not only between IM engines as we go forward on particular words, but also, frankly, we are reevaluating our spend between offline and online.

So a great test that we did. I think we learned a lot from it. I think we are going to be even more efficient than we have been in the past in terms of the efficacy of our IM spend. By the way, it had no impact at all on the results for the quarter, because the money we largely were spending on Google we moved to other partners and saw actually great ROI.

Operator

Your next question comes from Derek Brown - Cantor Fitzgerald.

Derek Brown - Cantor Fitzgerald

Sort of a broader question, but I am curious, why do you believe sellers are so slow to respond to improved conversions, improved ASPs, with more listings? Where do you think the obstacles are for them to get more product onto the site?

Meg Whitman

I think there's a couple of things. One is, Derek, this is a big ecosystem and we made a very significant change a year ago when we incentivized store inventory format listings at the expense of core. We actually really also changed the mix of fixed-price and auction in a way that I don't think was actually appropriate for the marketplace.

So I think they are sorting through fixed-price versus auction. They are sorting through average selling price on eBay's platform versus others. They are sorting through the volume that has always been the hallmark of eBay and continues to be the hallmark of eBay. I think as we get through some of these overlapping quarters in the marketplace, it settles out. As sellers increasingly see these increased conversion rates, listings will follow demand.

But I think we actually upset the balance of this marketplace last year even more than we had understood when we were in the middle of the shift in core issue, because it wasn't just lower-priced listings; it was the nature of the listing. It was fixed price versus auction. I think it was a pretty big shock to the system that is only now coming back into balance.

Derek Brown - Cantor Fitzgerald

Where would you point us to look to see the improvements in those metrics right now, I guess from a seller perspective?

Meg Whitman

Well, I think you have to look at conversion rate and average selling prices by market and by category. As Bob said, we are a little farther along on this journey in the United States than we are in Germany. What we saw in this quarter -- it is early and it's not a huge movement -- but we did see accelerating GMV growth in every single category. GMV was up 2 points. StubHub contributed to part of that. But I actually think we're seeing some strengthening of the core.

It is way too early to declare victory. We've got a lot more work to do. As I said, we've got more product changes coming to the site in the next six months than we have in the last three or four years.

The other thing I would say here is while we were focused on shift in core cleanup, the other thing that we really recognized was that we had to get after the user experience on eBay in a more aggressive way than we had in the past. That has been a lot of the work in the last six months, that I think will actually strengthen demand even further, which will in fact pull listings along.

Operator

Your next question comes from Anthony Noto - Goldman Sachs.

Anthony Noto - Goldman Sachs

Thank you very much. Two questions, one on PayPal and then one on GMV. On PayPal, you announced two new partners in the travel space, Northwest and I think Southwest. I was wondering if you think these two accounts will shorten the sales cycle into other travel providers, both the suppliers as well as the online travel companies?

The second question I have is GMV growth is obviously a measure of your ability to convert demand and supply. Could you give us a sense for how much demand growth is so that as you implement the different initiatives, Meg, that this may actually give us a sense of the upside in converting that demand?

eCommerce online, the best measure we have, is growing globally around 25%. Do you have demand growth of 25%, but you are only converting half of that? Could you give us a relative measure of your demand growth? Thanks.

Meg Whitman

I will take the easy question, we will give Bob the hard question. With regard to our travel product, at PayPal we've spent quite a bit of time getting two kinds of travel products right. One is a product for the airlines and the other is for the online travel providers like Orbitz, Expedia. Both of those needed actually quite some adaptation from our core merchant services product by the nature of the kind of business that they run.

For example, the travel providers, actually you have to create a PayPal distribution effect that, let's say I buy an airline ticket on Orbitz. Part of that has to go to the airline and part of that is the fee that Orbitz makes. You have to be able to handle that disbursement in a perfectly high-integrity way.

So we are pleased with the product. We have gotten good response. I would hope that the launch of Southwest and Northwest actually accelerates the adoption in the travel segment. These are industries where they do look to what people are doing. No one wants to be the last to adopt a new payment mechanism. So I feel pretty good, actually, about our progress in payments in the travel industry. I am excited about it, actually.

Bob Swan

Anthony, on your second question, we look at overall global market rates of growth, probably in the mid to lower 20s geographically slower in the U.S. and higher outside of the U.S. That is the market that we are going after.

In terms of how we measured our performance, more and more it's from revenue growth as opposed to just GMV growth, because the different formats and the different platforms that we're trying to build, whether it is classifieds, whether it is how we monetize traffic through advertising, whether it is online comparison shopping, we're trying to make sure we have the platforms in place to enable us to grow at market rates of growth. That is how we are approaching it.

Meg Whitman

The only other indication that you can look at, Anthony, is the amount of traffic that is coming to the site. That is holding up very well. We will know more at the end, obviously, of Q2. The industry traffic reports trail our traffic reports. But traffic is holding up, and I think as we launch these product features and as we launch our marketing campaigns in the fall, I will hope that we will get a disproportionate or more than our fair share of traffic coming to eBay.

Anthony Noto - Goldman Sachs

Would you share with us the growth from your internal logs and your traffic growth? The third-party services are not that accurate.

Meg Whitman

We typically don't release that because I think it is just better for everyone to rely on the same traffic reports.

Anthony Noto - Goldman Sachs

Thank you.

Operator

Your final question comes from Mark Mahaney – Citigroup.

Mark Mahaney – Citigroup

Great, thank you very much. I wanted to ask about one product, which is eBay Motors 2.0, the beta that you were showing at eBay Live in Boston looked very promising. It seems that product has been slow or maybe you’ve missed some deadlines. Can you just talk about the process there? When do you think we will see that, because it does look promising?

Real quickly, Germany and eBay U.S. GMV reacceleration challenges, how different do you think they are? In other words, if you get these learnings from what sounds like promising initiatives in Germany, do you think that they are easily applicable to the U.S. market or are the tools necessary to reaccelerate those two markets very different? Thank you.

Meg Whitman

Let me take Motors 2.0. We are excited about Motors 2.0, but as John Donahoe has often talked about, we now have a very robust AB testing capability inside eBay, which we did not have a year ago. And so, to make sure that Motors 2.0 was exactly right and didn’t disrupt the eBay Motors marketplace in an unintended way, we actually have been showing Motors to a randomly selected, relatively small segment. We have received a ton of incredibly valuable feedback during this initial testing phase. We are making a couple of tweaks to the product that actually on reflection, listening to this user feedback, makes a ton of sense.

And so we were ready to launch, but we through our AB testing capability, we decided to delay to make a few more product tweaks to make it exactly right.

The other thing I would say with regard to Motors is increasingly we are going to want to part vehicles from parts. Parts and accessories is doing incredibly well, it is one of our fastest growing categories around the world, and I think we are going to want to part those two.

And actually, eBay Motors, I think was better for vehicles than it was for parts, and we needed to make some tweaks to the parts side so that we didn’t have the law of unintended consequences on parts and accessories.

With regard to learnings across eBay, one of the things I think that has also taken place in the marketplace business is really terrific best-demonstrated sharing practices between all of the different countries. What we learn in the U.S. immediately gets ported to Germany, and vice versa. So pricing, which is controlled on a country level, all of those learnings are being fed in centrally. Things like the social networking components that we are playing with in Germany. If they work, they will be moved to the U.S. A lot of the product changes in the U.S. will be moved to Germany.

So I would say that when we actually hit on something that works, as we have, we will be able to roll it out much faster. Here is the other thing: we will be able to implement these product changes into the U.K., Italy, France, Spain, the Netherlands way ahead of the curve, so hopefully we won’t see the slowdown in those markets that we have in the U.S., because we will be ahead of the curve from a product planning point of view.

Good, okay. I think we are at the end of the time. Thank you very much for listening. We appreciate it.

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